The Sky Is Falling

OMG!

Oh, spit!

The sky is falling!

Stop. To steal a line from Cameron Crowe's 1989 Say Anything: "You must chill. You must chill."

Yes, I realize that the market's imploding. I get it. Over the past two weeks, the Dow Jones Industrial index has lost nearly 10% of its value. Yesterday, thanks to a brief relief rally, the Dow just missed posting its longest consecutive losing streak of the past three decades. But while up one day and down the next, the net effect is a lot of pain for a lot of investors.

Scanning the Fool headlines for today alone, we find Walter Energy (NYSE: WLT  ) down 25% on an earnings miss, Western Refining (NYSE: WNR  ) down another 20% on its own Q2 disappointment, and Dendreon (Nasdaq: DNDN  ) topping 'em all -- plummeting 65% on the news that -- shocker -- not everyone can afford to pay $93,000 for its new cancer treatment. And while I'm fortunate enough not to own any of these particular bombs, I still feel your pain. My shares of Micron (NYSE: MU  ) are today worth about 20% less than what I paid for them just a few months ago -- and Micron didn't even report earnings! Collectively, we as investors have just seen nearly four months' worth of gains -- wiped out in a matter of days.

Scary.

Yet if you're reading this, it means I'm still typing. I haven't jumped out any windows. (Not that it would help. I'm on the ground floor.) That sort of dramatic overreaction doesn't help. Panicking as your stocks plummet won't slow their fall, and it won't salvage your portfolio -- it'll just lock in your losses.

Well, what should we do?
You should thank the good Lord for days like today, and like May 6, 2010, which provide object lessons in the volatility of the markets. Maybe it was the crisis in Greece that caused last year's "flash crash." Maybe it was the debt crisis, or the half-measures that averted it, that caused today's selloff.

Whatever the reason for the market's sudden bout of volatility, it does at least remind us that asset prices can go down as well as up. Otherwise, we might do something stupid -- like, say, pay nearly 400 times forward earnings for a share of salesforce.com (NYSE: CRM  ) . Or buy a $200,000 house for $300,000, finance it with a no-money-down subprime ARM at 2% with a six-month balloon payment, and then wonder why we can't afford the mortgage when the rate resets to 6% and our monthly payments suddenly triple.

Hypothetically speaking, and present company excluded, of course.

No, no -- what should we do about the stock market?
Oh, right. Well, just keep on doing what you've been doing. I did say "present company excluded," right? So keep collecting and depositing your paychecks. Keep researching high-quality, low-priced stocks. Keep buying shares at a significant margin of safety. And, as always, keep purchasing no more of any given stock than you can afford to lose. (Because, after all, we all make mistakes from time to time.)

Once you've got that down, though, it's time to get greedy.

Greed is good
See the opening lines of this column up above? A lot of investors are saying things like that right now. Even the pros are panicking. The hedge-fund types? They're worrying about making their quarterly numbers, and they're selling out of positions they love, in a frantic attempt to staunch the bleeding.

Meanwhile, you should consult your stock "wish list" -- you've drawn one up, right? -- and see whether the panic selling has pushed any of your favorite stocks down below your hoped-for buy-in price. Today just might be your lucky day.

Further fearless Foolishness:

The sky has fallen before, Fools. Previous versions of this article ran on Fool.com in 2007, 2008, and 2009.

Fool contributor Rich Smith owns shares of Micron Technology, but he holds no other position in any company mentioned. Check out his holdings and a short bio.

The Motley Fool owns shares of Western Refining. Motley Fool newsletter services have recommended buying shares of salesforce.com. Other Motley Fool newsletter services have recommended shorting salesforce.com. Try any of our Foolish newsletter services free for 30 days.

We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2011, at 5:23 PM, TSIF wrote:

    Good reminders overall Rich, but I need to warn you that your title is trademarked and copyrighted. If the economy continues to tank, I may take my meager funds and hire a lawyer and get some of it back for copyright infringement.

    TSIF (The Sky is/isn't Falling Today)

    (Depends on your perspective....I have both copyrighted just in case). ;)

  • Report this Comment On August 04, 2011, at 5:40 PM, pscholte wrote:

    "Once you've got that down, though, it's time to get greedy.

    Greed is good

    See the opening lines of this column up above? A lot of investors are saying things like that right now. Even the pros are panicking. The hedge-fund types? They're worrying about making their quarterly numbers, and they're selling out of positions they love, in a frantic attempt to staunch the bleeding."

    Two comments: (1) Greed got us into the mess we are in today; (2) I fear your advice will prove to be far more glib than it is wise; this isn't 2008

  • Report this Comment On August 04, 2011, at 5:41 PM, Bossmatt wrote:

    The worst problem with today is that it is NOT a flash crash. Other than yesterday, it's been going down for 8 sessions. The passage of the debt ceiling bill did not even give the market any lift, showing us that market had already priced in the passage, and had no confidence in Europe as wella s domestic job and growth prospects. i don't believe it reached the bottom yet, and I'm not getting back in until there is major life signs.

  • Report this Comment On August 04, 2011, at 6:30 PM, TMFDitty wrote:

    TSIF: I defer to your claims of prior copyright and higher CAPS score. My deepest apologies.

    TMFDitty

  • Report this Comment On August 04, 2011, at 8:12 PM, mdada wrote:

    I have not understood any of the booms in the history except basic needs or imaginations to be fulfilled. Actually all these recessions and problems in Europe are good. This will make people think how to build economy vs keep riding some kind of delirium. Some said Greed is good and in the same place the guy's Dad after his jail thing that now you will do some good work. Our health sector is totally corrupt and so is the Govt. but historical there has never been a change without radical shift and I don't see that being possible in next twenty years. USPS wants to shutdown shutters and I don't know how will Meritline will ship their trinkets. I don't know why junk worthy news papers are thrown in-front of my drive-way. We have stop wasting paper or stop wasting every thing. We have Mayor in Houston who I don't think is worthy of any Financial planning except competing with Sarah Palin and they you blame her for recession. Barak Obama is a lawyer not wealth creator and Warren Buffet is wealth collector not distributor.

  • Report this Comment On August 04, 2011, at 9:59 PM, wolfhounds wrote:

    Yes, I did thank GOD, consulted my wish list, took the $14k sitting in my Roth and added to my MCD and WM. There will always be hamburgers & fries, and garbage to collect and recycle.

  • Report this Comment On August 04, 2011, at 11:00 PM, rodnog wrote:

    I'm just 3 weeks new to the whole investing thing - sorry guys, i think i broke the market.

    I have read in many places that one should set a stop loss (mental or GTC) at 10%. I'm curious, because nothing i read in TMF seems to advocate that. What is the general consensus?

  • Report this Comment On August 05, 2011, at 12:09 AM, TMFDitty wrote:

    @rodnog: Don't worry about it. We bought the extended warranty. (And the stock market repairman promises he'll be here within an 8-to-12 month window.)

    On stop losses, there's no official Fool position, but the general consensus (I think) is that they don't work as well as advertised. You can start reading about them here:

    http://www.fool.com/investing/small-cap/2004/11/11/stoploss-...

    And learn a bit about the pitfalls here:

    http://www.fool.com/investing/value/2007/10/03/the-other-sid...

    TMFDitty

  • Report this Comment On August 05, 2011, at 12:19 AM, marc5477 wrote:

    The last time the sky was falling I went from $50k to $1.7m. This time I have $200k to throw around. Please push it down some more lol. I am drooling over the idea of 10% yield blue chips lol.

  • Report this Comment On August 05, 2011, at 1:14 AM, TimothyVR wrote:

    This time the class-act blue chips like KO, MCD, IBM and even JNJ have not been hit as hard as they were in the last periods of hysterics. Yes, IBM took a significant hit today but it is still up sharply for the year.

  • Report this Comment On August 05, 2011, at 1:59 AM, marc5477 wrote:

    :Timothy

    Okay I will settle for 5% yield blue chips and 15%-20% on A-AA rated stuff bonds. That's how it was in '08-'09. Actually made most of my money was made on the bonds some yielding 40% at B-BBB. So far bonds havent really been hurt at all so you are right this is no '08-'09 crash. The markets have been down for two months now and good debt issues havent been hurt much at all.

    That said insurers have been hit very hard. Im keeping a close eye on CINF which is a borderline blue chip. I would love to pick up more DOW or GE at $8 or SBUX at $10. Those were eye poppers back then.

  • Report this Comment On August 05, 2011, at 2:04 AM, stan8331 wrote:

    The memory of late 2008 / early 2009 is still fresh enough that nobody wants to be the last one out the door this time. Of course the problem with that approach is looking in the rear view mirror rarely gets you anywhere you want to go. I think we're going to continue to see overreactions to mildly bad news for some time to come. The way to profit is to keep some cash on hand and start buying when the market starts panicking.

  • Report this Comment On August 05, 2011, at 2:59 AM, bmih wrote:

    Hmm, salesforce.com was one of your Rule Breaker most recommended investment not a year ago, when the as I remember the p/e was around 400.

    Isn't it one of your advices as a group "don't get scared of big p/e numbers?"

    More coherence in your articles guys!

  • Report this Comment On August 05, 2011, at 4:38 AM, adcmelb wrote:

    Has everyone failed to realise how profitable corporate America is?

  • Report this Comment On August 05, 2011, at 5:18 AM, MichaelDSimms wrote:

    Some food for thought, if you are contributing to a 401k like myself and the stock market drops like a rock such as the last week. Is this good, well it is for me, I get more stocks for my money. Since I am not planning to retire for at least another 15 years as I am 50, I will start to worry 3-5 years out from my retirement, not now. For now I am getting a good deal on my purchases. In fact compared to the last 10 years I would say sale prices. I am also paying under 5% on my mortgage. So unless you ARE retiring in the next 3 or 4 years enjoy the sale.

  • Report this Comment On August 05, 2011, at 7:39 AM, ravenesque wrote:
  • Report this Comment On August 05, 2011, at 8:23 AM, joaquingrech wrote:

    I actually wrote about the same thing yesterday: http://principleinvesting.wordpress.com (that's my blog, for when i'm bored)

  • Report this Comment On August 05, 2011, at 8:46 AM, NEMnyWtch wrote:

    I don't know fools - I think the sun may be coming out a little. Jobs up 117K, and upward revisions for the past two months. Will someone ask El-Erian to put a sock in it???

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